The market is pricing in an 84% probability of a rate hike by the Bank of Japan in September.
The forecast market has radically revised expectations regarding Japan's monetary policy. In just two weeks, the probability of the Bank of Japan raising its key interest rate at the September meeting has soared from 22% to 84%. This is a signal that cannot be ignored: traders and investors are increasingly betting on a tightening of the regulator's policy.
Why is the yen weakening again?
The main catalyst is disappointment with the currency interventions by Japanese authorities. Despite coordinated actions in late July and early August, the yen failed to hold onto its gained positions. This week, the USD/JPY exchange rate fell by approximately 1%, to 159.43 yen per dollar, marking the worst weekly performance since May. In essence, the currency has retreated by half of the gains that followed the interventions, when the rate pulled back from the 164 level.
This is déjà vu for the market: a similar picture was observed after the April interventions, when the yen again slid toward multi-year lows over several months. As practice shows, one-off measures do not change the trend without support from fundamental factors.
Betting on the central bank's resolve
The key question now is whether the Bank of Japan will move from words to action. Former top Tokyo currency diplomat Mitsuhiro Furusawa does not rule out new interventions, but the market is waiting for a more effective tool—a rate hike. Inflation in Japan is approaching the target level, and it is becoming increasingly difficult for the regulator to justify its ultra-loose policy.
OCBC strategists, including Sim Moh Siong, rightly note: "It is not surprising that the yen has again lost ground." A trend reversal is possible only with a clear signal from the central bank about its readiness to tighten monetary policy. If the Bank of Japan leaves the rate unchanged in September, the market will react with immediate disappointment, and the yen may again head toward 160 per dollar.
My view: The probability of a rate hike is indeed high, but 84% is already an overestimation. The market tends toward extremes, and if the regulator does not meet expectations, volatility in the yen will be extreme. Given that the Japanese currency remains a key factor for global markets, including carry trades in cryptocurrencies, the September decision deserves particularly close attention.